Our Economics department keeps track of all the important developments in the financial markets in both advanced economies and emerging markets. We will be publishing weekly briefings with analytical assessments of the current macroeconomic and financial market situation. Find out more about the EIB Group's response to the crisis
- The first releases of hard and soft economic indicators for the world and the EU economy are extremely pessimistic. Some economic sentiment and consumer confidence indicators are approaching the lowest levels ever observed and point to a severe contraction of economic activity. This could reach anywhere between -5% and -10% or more in the euro area in 2020 according to the latest forecasts (Section 1). As the crisis unfolds, it is clear that the unemployment and debt levels in Europe will remain elevated for some time.
- To counteract this unprecedented shock, policymakers are implementing new measures at the national and supra-national level (Section 2). In the EU, the amount of fiscal measures at national level has reached about 2% of GDP mid-last week, doubling within seven days and still increasing in size albeit with significant differences across Member States. Support schemes for firms and workers have been shored up and additional direct support for hospitals and the health sector is foreseen in some cases (for example, Italy, Lithuania and Germany). Member States have put in place additional measures to mitigate the social hardship resulting from the temporary drop in income. This includes support for parents staying home (Romania), expanded unemployment benefits (Malta) and possibilities to defer rent or mortgage payments and steps to support entrepreneurs and the self-employed, including in France and Germany. Credit guarantees for firms by Member States are also substantial (estimated to exceed 10% of GDP, for instance, in the Czech Republic, France and Germany). The US approved an economic support package worth USD 2 trillion (about 9% of GDP). This is twice as big as the package implemented in response to the global financial crisis in 2008-09.
- At the EU level, flexibility via the Stability and Growth Pact was granted, and new policies are currently being discussed. Those include a proposal for the European Stability Mechanism (ESM) to develop a precautionary facility with/without reduced conditionality using the ESM’s existing financial resources (Section 3) and a proposal by the EIB to go beyond its initial up to EUR 40 billion COVID-19 economic response package. A decision on further measures at EU level to tackle the socio-economic consequences is still pending and the European Council asked the Eurogroup to present proposals within the next two weeks. A timely and sizable response - targeting the sectors of the EU economy that are being most hardly hit (households, services, micro, small and medium enterprises) - is of paramount importance: hardship is being felt across the more vulnerable segments of the population and may soon give rise to bouts of social discontent.
- Across the globe, financial conditions remain tight and some sovereigns (most notably the UK) and corporates have had their ratings downgraded (Section 3). Equity markets in advanced and emerging economies recovered somewhat, but volatility remains elevated. Markets show that banks might also experience some funding difficulties, although quite different in nature from those observed during the 2008-2009 global recession. Banks being the key external funding source for SMEs, the backbone of the EU economy, they also need to be safeguarded.
- This note also contains a preliminary analysis of the economic impact of COVID-19 outside the EU and identifies the main channels of transmission of the crisis (Section 4), including direct impacts of lockdowns; disruption in via global value chains; drop in global demand for commodities and tourism; contraction remittance inflows and access to international finance; and stress on vulnerable sovereigns.
As of 30 March, since the start of the pandemic there have been about 750,000 infections, more than 35,000 people have died, while more than 150,000 people have recovered from COVID-19. The US became the epicentre of the virus (Figure 1), with Italy having the heaviest death toll in the world (over 11,000 people) and Spain is fast approaching. The latest official data on mortality shows that the elderly and people suffering from a combination of chronic diseases, including cardiovascular problems, diabetes, respiratory problems and cancer, are disproportionally more affected and vulnerable, keeping in mind that social responsibility to contain the spread of the virus goes well beyond these vulnerable groups.
Policymakers around the world have responded with further actions to counter the dramatic economic fallout of the COVID-19 pandemic. The single most important response came from the United States where the Senate unanimously passed a USD 2 trillion (about 9% of US GDP) economic support package on Wednesday, March 25th. The size of the package is unprecedented in US history. Its components include an envelope of USD 250 billion for payments to individuals of about USD 1,500 per adult. USD 250 billion is set aside to expand the unemployment coverage, including support for freelancers. The bill also establishes a USD 100 billion public health and social emergency fund to reimburse providers for expenses and lost revenues. To support distressed businesses, a loan and guarantee package is also included in the bill, including USD 350 billion in small business loans, and USD 500 billion in loans for distressed companies. Student loan repayments are also to be suspended.
EU Member States have also put forward a set of response measures to the pandemic. The amount of fiscal measures at national level has reached about 2% of GDP mid-last week, that is twice the size compared to only about a week ago and is increasing in size. Fiscal stimulus and other support measures vary in size across Member States and in terms of the specific instruments deployed, also reflecting domestic circumstances1, with additional direct support to hospitals and the health sector (e.g. Italy, Germany) and support schemes for firms and workers shored up. Notably, Member States have put in place additional measures to mitigate social hardship resulting from the temporary drop in incomes and to support entrepreneurs and self-employed (e.g. France and Germany).
At the EU level, a number of measures have been discussed. Proposals are currently focusing on the possibility for euro area countries to expand their room for fiscal manoeuvre through some form of risk-sharing. These would come on top of steps already taken so far, which include the application of full flexibility of the EU fiscal rules and the revised State Aid rules, increasing leeway for Member States’ policy action, and common support via the EUR 37 billion Coronavirus Response Investment Initiative (CRII) to support small businesses and the health care sector. Moreover, the European Central Bank's (ECB) EUR 750 billion Pandemic Emergency Purchase Programme (PEPP) is a major step to provide relief via monetary policy action.
The proposal of the EIB to set up a EUR 25 billion pan-European guarantee fund with contributions from Member States to boost support for firms in the EU has also been discussed at Ecofin and Eurogroup levels. The fund could build on the EIB Group’s already existing guarantee programmes and pan-European deployment channels, and therefore be deployed within a very short timeframe.
The European Commission also indicated that it is considering additional measures. Commission President Ursula von der Leyen issued a statement over the weekend (March 28th) indicating that the Commission will participate in these discussions and stands ready to assist.2 In parallel, the Commission is working on proposals for the recovery phase within the existing treaties, such as full flexibility of existing funds - such as the structural funds. The Commission will also propose changes to the MFF proposal and include a stimulus package that will ensure that cohesion within the Union is maintained through solidarity and responsibility. The President stated that she is not excluding any options within the limits of the Treaties.
1) Including NPB involvement and social support systems.
2) See link: https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_20_554
Stock prices rebounded substantially. The rebound, of around 10% on a weekly basis, was comparable across the main developed economies, the US, EU and Japan (Figure 5). In Europe, around one-third of the fall recorded since the beginning of the crisis has been recovered, with stocks remaining 20% below their level in 2019 to date. The rally reflects a positive reaction to the policy measures announced this week, particularly the US package and the G7 Statement emphasising the commitment to collective and coordinated actions.
Non-EU economies are also likely to experience a painful shock. Several non-EU countries are already reporting a large number of cases, with Iran, South Korea, Turkey and Brazil reporting the largest numbers. Case numbers are significantly lower elsewhere, including in most African countries. However, cases may be underestimated, due to limited capacity for testing, and the epidemic is expected to accelerate across the globe. The ability of health systems to cope varies widely. In many countries, health systems are extremely weak, particularly in low-income countries. If infections take off, as sadly seems likely, the human impact could be devastating, in the poorest countries in particular. There is a risk that the crisis, exacerbating existing fragilities, could lead to social unrest and a deterioration in security, particularly in countries that are already fragile or conflict-affected.
Six main economic transmission channels can be identified for these countries:
- Direct impacts of lockdowns, travel restrictions and border closures, as well as higher rates of morbidity and mortality. Most countries are in the process of imposing lockdowns, border closures and other restrictions, which are slowing economic activity. Demand is plunging, production is disrupted and investment plans are being put on hold. Lockdowns are hurting labour-intense service sectors, affecting in particular countries where unemployment is already high.
- Decline in commodity prices (e.g. oil, gas, copper and iron) triggered by the economic slowdown in virus-affected countries and the oil price war. According to IHS, the oil price slide will depress economic activity by almost 1% of GDP in Mexico, Brazil and Colombia. In Ecuador oil contributes 10% of GDP, and oil revenues are now forecast at USD 3.2b in 2020, compared to over USD8b in 2019. In Sub-Saharan Africa (SSA), the major oil exporters, such as Nigeria and Angola are highly exposed. Some of the poorest countries in the world, such as Sierra Leone, Liberia, Democratic Republi of the Congo and Zambia will also be impacted by falling prices of iron ore and copper. The sharp decline in oil and commodity prices adds a strain also on commodity exporters in the EU Southern and Eastern Neighbourhood, (e.g. Algeria, Azerbaijan, Kazakhstan, Russia, Uzbekistan and Ukraine as transit, Belarus as transit and oil refining).
- Disruption to global supply chains and demand for manufactured goods from countries impacted by COVID-19. Latin America (LATAM) is highly exposed, as 43% and 12% of exports are to the USA and China, respectively. Supply chain disruptions are going to be heavily felt in Asia: shortages in textile supply from China are leaving hundreds of thousands workers unemployed in Cambodia and Bangladesh for instance. Manufacturing is of relatively limited importance for SSA as a whole, but countries such as South Africa will be badly impacted and the breakdown of supply chains may make it difficult for countries to access food and essential medical supplies. SSA is the region most reliant on food imports in the world, and all countries are net importers of medical supplies. LATAM is heavily dependent on imports from the US. The relatively high level of trade integration of the Western Balkans with the EU, in particular with Italy and Germany, has resulted in a halt of industrial production in the region. Good exports from the Eastern Neighbourhood are also highly dependent on European and Russian demand, so these countries will be heavily impacted, including for instance Ukraine (highly reliant on manufacturing), Uzbekistan (one of the largest producers of cotton) and Belarus (e.g. oil refineries and potash).
- Disruption to tourism and remittance flows. Several island states and a number of other economies will be badly hit by a decline in tourism, while many countries are vulnerable to a decline in remittances. The current account of oil importers (e.g. Armenia, Georgia, Jordan, Moldova, Morocco, and Tunisia) and all Western Balkan countries will be affected by lower remittance inflows and weaker demand for goods and services, including tourism (e.g. Egypt, Georgia, Armenia, Moldova, Montenegro and Albania). Twelve countries in SSA are particularly exposed to the impacts on tourism, with tourism revenues accounting for over 10% of GDP –Seychelles, Cape Verde and Mauritius are the most affected. Six SSA economies will be particularly impacted by a drop in remittances, as these account for over 10% of their GDP. Of these, five are also among those most affected by a drop in tourism revenues. South-East Asia and the Caribbean are also particularly exposed to a drop in tourism and remittances.
The world economy is faced with an unprecedented shock and strong policy responses are being taken. While forecasts remain ‘work in progress,’ a global recession is on the cards according to all analysts and commentators. The size can be expected to be comparable or even higher than the 2008-09 global financial crisis, the duration is still highly uncertain, but unprecedented policy response also gives some comfort for a recovery. Yet, the long-term effects of COVID-19 are not to be underestimated. This holds particularly true for the EU, where multiple spillovers between the real economy and financial markets and feedback loops between corporates and banks on the one side, and banks and sovereigns on the other, are very real, as already witnessed during the sovereign debt crisis. To contain the economic fallout, national and EU-wide responses need to be credible, coordinated and fast. They also need to target the hardest hit segments of the economy.
The capacity of health systems needs to be addressed as a priority as this has reached the limits in the most exposed countries. Direct support to firms developing vaccination and treatments and financial aid to hospitals should be put very high on policy agendas. The SME sector, the backbone of the EU economy for employment creation, will suffer disproportionally and therefore, measures to protect jobs and production capacity need to be drastic. These can take a form of direct financial support, guarantees, tax reliefs, measures to prevent large scale lay-offs etc.